Complainant James Ahlstedt appeals from an initial decision by a Judgment
Officer dismissing his complaint alleging wrongful liquidation and breach
of fiduciary duty. The Judgment Officer did not decide the wrongful
liquidation claim, dismissing the complaint because Ahlstedt failed to
mitigate damages. On appeal, complainant argues that the Judgment Officer
acted prematurely in issuing the decision without granting the parties an
oral hearing to resolve conflicting facts. Complainant also contends that
he did not mitigate his damages because it would have required that he
re-enter the market without reasonable assurance that respondents, who
allegedly liquidated his account in bad faith, would not repeat their
misconduct.

As explained more fully below, we remand to the Judgment Officer for an
oral hearing(1) to determine if there was
a wrongful liquidation and, if there was, for the assessment of damages
in accordance with our instructions.

BACKGROUND

Complainant James Ahlstedt, a management consultant,(2) opened a commodity futures account with Edmund
Hysni, an associated person at Capitol Commodity Services, Inc.
("Capitol"), an introducing broker, in March 1994. The account
statements were generated by Vision Limited Partnership
("Vision"), a futures commission merchant ("FCM")
through which orders were executed.(3)
Complainant had traded commodity futures for two years prior to opening
an account at Capitol.

On April 10, 1995, Ahlstedt entered a position of six long palladium
futures contracts. At the time, complainant had $7,000 in margin funds on
deposit. An initial margin of $4,800 was required for the six contracts.
During the next eight and a half months, the price of palladium futures
fell, absorbing the excess deposit in the account and requiring Ahlstedt
to make six additional margin deposits totaling $16,900. On the morning
of December 28, 1995, Hysni contacted complainant to inform him of a
$3,500 margin call on his contracts.(4)
Ahlstedt did not pay the margin call during the day. When Ahlstedt called
Hysni after the close of business, Ahlstedt was informed that his
positions had been liquidated.

On February 1, 1996, complainant filed a prose reparation
complaint(5) against Capitol, Alan Cohen,
Capitol's President, and Hysni,(6)
alleging wrongful liquidation and breach of fiduciary duty. He claimed
$25,000 in damages.(7) Capitol, Cohen, and
Hysni filed a joint answer and Vision later adopted that answer as its
own.(8)

The parties presented two versions of the liquidation. According to
Ahlstedt, he had made numerous trades since the opening of his account.
Ahlstedt asserted that, when five previous margin calls had been made on
his account, he had paid the margin calls in a timely manner. Ahlstedt
stated that, when Hysni called him on December 28 and informed him of a
margin call, he promised to pay the margin and to phone Hysni later in
the day to ascertain the amount of money owing. When Ahlstedt phoned, he
learned that his positions had already been liquidated. Ahlstedt asserted
that Hysni offered him a chance to re-enter the market if he would post
the required $3,500 margin. Complainant refused.

Ahlstedt stated that on January 3, 1996, he phoned Dan Laczynski,
Vision's margin manager, to inquire why his account had been
liquidated on December 28. Based on this conversation, which Ahlstedt
recorded,(9) he learned from Laczynski
that his account had been subject to a margin call for six days prior to
December 28. Laczynski told complainant he had to liquidate
complainant's positions because the account was about to go into a
debit balance. Laczynski claimed that he had made numerous calls but
could not reach Hysni during market hours on December 28 and had no
indication whether Ahlstedt would post additional money. Further,
Laczynski expressed his understanding that Ahlstedt had been given notice
of a margin call by Hysni prior to December 28. Ahlstedt responded that
he was never informed by Hysni that his account had been under-margined
for six days, and he would have made the margin call as he had done in
the past. Ahlstedt explained to Laczynski that previously he had sent in
margin checks on the same or the following business day that he was
informed of a margin call. Ahlstedt told Laczynski of Hysni's
suggestion that complainant "could come [back] in at any time."
Laczynski confirmed that complainant could re-establish his positions if
he would send in additional money.

Subsequently, Ahlstedt alleged, he made a telephonic complaint to
respondent Alan Cohen, Capitol's president. According to complainant,
Cohen informed him that Capitol would not reinstate his positions and
that he could re-enter the market only if he were willing to "start
over from scratch like any new customer." Respondents denied
wrongful liquidation, contending that on December 28 Ahlstedt did not
promise Hysni that he would make the margin call, but stated that he
would call Hysni after the close to see if the market had moved
favorably. Respondents alleged that Ahlstedt frequently ignored and
repeatedly failed to make margin calls in the past and in doing so had
exposed respondents to market risk. In support of their allegations they
produced phone logs. Thus, respondents contended that the liquidation was
justified. In addition, respondents averred that complainant had ratified
the liquidation by failing to object affirmatively or in a timely manner.
Respondents also alleged that Ahlstedt had failed to mitigate damages.

On December 19, 1996, the Judgment Officer issued an initial decision
dismissing the complaint.(10) He held
that:

[C]omplainant cannot legitimately attribute his being out of the market
to respondents' actions. Even if the liquidations were improper--and
there is strong evidence in favor of such a conclusion--complainant could
have gone right back to the market and limited his losses. . . . That he
was allegedly afraid of being liquidated again is no excuse, because
posting sufficient margin could have prevented any such possibility from
occurring.

(Initial Decision at 3.)

The Judgment Officer expressed doubt that respondents liquidated
Ahlstedt's account because of his past history of ignoring margin
calls. The Judgment Officer pointed out that in the January 3, 1996 phone
conversation between Laczynski and Ahlstedt, Laczynski admitted that
Vision did not have any trouble with his account. Id. The Judgment
Officer did not find any evidence that Ahlstedt ignored or failed to meet
prior margin calls in a timely manner; that a single margin call was ever
communicated to complainant in writing; or that respondents had ever
expressed dissatisfaction with Ahlstedt's method of sending checks to
post the margin. The Judgment Officer also rejected respondents'
argument that the Vision customer agreement enabled respondents to
liquidate complainant's account regardless of whether prior notice
was given to him.

DISCUSSION

Complainant filed a notice of appeal on January 7, 1997, attaching a
two-page appeal brief.(11)

He reiterates on appeal that his decision to stay out of the market was
due to respondents' misconduct. He contends that the Judgment Officer
erred by failing to resolve the factual issues by an oral hearing.
Respondents filed an answering brief. Respondents assert the same
affirmative defenses submitted below and contend that a hearing was
unnecessary. Respondents argue that, even if an oral hearing had been
held, it would not have changed the outcome of the case since
complainant's refusal to re-enter the market proximately caused his
damages.

We have reviewed the record and have determined that the case should be
remanded to the Judgment Officer because he erred in ruling that
Ahlstedt's failure to mitigate defeated his claim. The Judgment
Officer should conduct an oral hearing to develop further facts on the
record regarding Ahlstedt's wrongful liquidation claim.(12) He should make credibility assessments and
factual findings to decide whether the liquidations were improper.
Cf.Nacht v. Merrill Lynch, et al., [1992-1994 Transfer
Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,057 at 41,396 (CFTC Apr. 19,
1994).

We have held that when a customer, once notified, fails to meet a
legitimate margin call, an FCM may liquidate a customer's account to
protect its financial interests. Baker v. Edward D. Jones &
Co., [1980-1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶
21,167 at 24,772 (CFTC Jan. 27, 1981). On the other hand, we recognize
the customer's right to damages in a margin call situation when the
FCM misled its customer concerning its margin or liquidation policies.
SeegenerallyLevi-Zeligman v. Merrill Lynch,
[1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,236 at
42,030-42,031 (CFTC Sept. 15, 1994) and Baker, ¶ 21,167 at
24,771. In this case, Hysni, Capitol, and/or Vision may have led Ahlstedt
to believe that he would be given more time to respond to the margin
call. The course of conduct between the parties must be examined to
determine whether wrongful liquidation occurred.

In alleging a wrongful or unauthorized liquidation, a customer may rely
on the general rule that under the Act, an FCM has a duty to follow a
customer's instructions regarding his money and property. Slone v.
Dean Witter Reynolds, Inc., [1994-1996 Transfer Binder] Comm. Fut. L.
Rep. (CCH) ¶ 26,283 at 42,433 (CFTC Dec. 16, 1994). The burden is on
the respondents to establish that the liquidation was proper in light of
the margin call and the course of conduct between the parties.

In the event the Judgment Officer determines that the liquidation was
wrongful, damages are to be assessed against respondents. Schultz v.
Commodity Futures Trading Com'n, 716

F.2d 136, 139 (2nd Cir. 1983) citingGaligher v. Jones, 129
U.S. 193, 199-202 (1889). Generally, the measure of damages in a wrongful
liquidation case is calculated using either "(1) [the value of the
futures position] at the time of conversion or (2) its highest
intermediate value between notice of the conversion and a reasonable time
thereafter during which [the futures position] could have been replaced
had that been desired, whichever is higher." Id. at 141;
accordKatara v. D.E. Jones Commodities, Inc., 835 F.2d 966
(2d Cir. 1987); Stiller v. Shearson, [1982-1984 Transfer Binder]
Comm. Fut. L. Rep. (CCH) ¶ 21,974 (CFTC Jan. 4, 1984). There is no
duty on the part of complainant to actually re-enter the market, and the
Judgment Officer erred in so ruling. Id. at 140, citing
Letson v. Dean Witter Reynolds, et al., 532 F. Supp. 500, 503 (N.D.
Cal. 1982). Nevertheless, the possibility of complainant's re-entry
into the market "establish[es] the outer limit of a reasonable
period during which the highest intermediate value of the lost [futures
position] could be ascertained." Id.

The "reasonable period" represents the time during which the
trader--having learned that his or her position has been involuntarily
liquidated--might reasonably be expected to enter the market at the
broker's expense. Letson, 532 F. Supp. at 503. The
determination of a reasonable time period varies from case to case and is
based on the facts and circumstances of the particular case.
Katara, 835 F.2d at 973; Stiller, ¶ 21,974 at 28,181. The
time needed to re-enter the market depends on several factors to be
developed in the record including the trader's experience,
capabilities and resources, the conduct of the broker, and the nature of
the market involved. Letson, 532 F. Supp. at 504. On remand, the
parties may present evidence assisting the Judgment Officer in making
this determination.

Accordingly, we remand this case to the Judgment Officer to hold an oral
hearing and to decide the claim in accordance with our instructions.

IT IS SO ORDERED.

By the Commission (Chairperson BORN, and Commissioners DIAL, TULL, HOLUM,
and SPEARS).

3. Capitol has been registered with the
Commission as an introducing broker since July 11, 1984. Vision has been
registered with the Commission as a commodity pool operator
("CPO") since February 1, 1988, and as an FCM since May 16,
1990.

4. It is not established on the record
whether Hysni communicated that the margin call had existed for several
days.

5. Complainant elected the voluntary
decisional procedure.

6. Complainant amended his complaint in
March 1996 to include Vision.

7. Complainant later adjusted the damages
claimed to $24,000, which represents his initial deposit of $7,000 and
the additional $16,900 he paid in six subsequent margin deposits.

8. Respondents elected the summary
decisional procedure.

9. Complainant taped the January 3, 1996
conversation and submitted a tape cassette containing this conversation
as evidence. The version of the liquidation submitted by Ahlstedt is a
summary of the taped conversation. Respondents contend on appeal that the
taping of the conversation by complainant was "illicit" because
it allegedly was done without Laczynski's knowledge. The Judgment
Officer took notice of the taped conversation in the initial decision but
did not address its legitimacy.

10. Under the summary procedure, proof is
by documentary submission. Commission Rule 12.208(b), 17 C.F.R. §
12.208 (1997) provides that a Judgment Officer "may order an oral
hearing . . . when appropriate and necessary for the resolution of
factual issues, upon motion by either a party or the Judgment
Officer." On December 11, 1996, complainant filed a written request
for an oral hearing, disputing respondents' submissions as patently
false. In addition, complainant asked for punitive damages in the amount
of $10,000. Complainant's request for an oral hearing was not
received by the Office of Proceedings until December 23, 1996.

11. Complainant subsequently requested
that his two-page brief be considered as an "informal" appeal
brief in accordance with Commission Rule 12.401(d), 17 C.F.R. §
12.401(d) (1997). We hereby grant his request and accept his submission
as an appeal brief.

12. In assessing reparation claims, we
exercise our own independent judgment and do not defer to the findings of
fact made in the initial decision, although the credibility
determinations of the fact finder are accorded deference. Accordingly, we
review the evidence in the record denovo.